Order price threshold for automated market system

ABSTRACT

A method for trading a security in an electronic market includes entering an order at a client station for executing against any market participant that can at least in part satisfy the order, determining a threshold for executing the entered order based on an inside price of the security in the electronic market, matching a portion of the entered order at a server system against interest in the market that does not exceed the determined threshold, and returning any unmatched portion of the entered order that can not be matched by the interest in the market without exceeding the determined threshold.

RELATED APPLICATIONS

This application is a continuation-in-part application of U.S. patentapplication Ser. No. 09/401,872, Filed on Sep. 23, 1999, now U.S. Pat.No. 7,181,424 and entitled “MONTAGE FOR AUTOMATED MARKET SYSTEM”,assigned to the assignee of the present invention and incorporatedherein by reference.

BACKGROUND

This invention relates to trading systems particularly financial tradingsystems.

Electronic equity markets, such as The NASDAQ Stock Market® collect,aggregate and display pre-trade information to market participants. Inan electronic market, pre-trade information takes the form of a quotethat represents a single or an aggregate of same-priced principal oragency orders. A market such as NASDAQ also provides trading platformsthrough which market participants may access liquidity indicated in themarketplace. One of the concerns of regulators relates to bestexecution. Other entities may display quotes or place orders fordisplay. For example, electronic commerce networks, (ECNs) are one type.Some ECNs charge quote access fees while others do not. Other entitiesinclude UTP Exchanges. UTP Exchanges are exchanges that have unlistedtrading privileges.

SUMMARY

According to an aspect of the present invention, a method for trading asecurity in an electronic market includes, entering an order at a clientstation for executing against any market participant that can at leastin part satisfy the order, determining a threshold for executing theentered order based on an inside price of the security in the electronicmarket, matching a portion of the entered order at a server systemagainst interest in the market that does not exceed the determinedthreshold, and returning any unmatched portion of the entered order thatcan not be matched by the interest in the market without exceeding thedetermined threshold.

According to an additional aspect of the present invention, a computerprogram product residing on a computer readable medium, for trading asecurity in an electronic market, includes instructions to cause acomputer to enter an order at a client station for executing against anymarket participant that can at least in part satisfy the order, todetermine a threshold for executing the entered order based on an insideprice of the security in the electronic market, to match a portion ofthe entered order at a server system against interest in the market thatdoes not exceed the determined threshold, and to return any unmatchedportion of the entered order that can not be matched by the interest inthe market without exceeding the determined threshold.

According to an additional aspect of the present invention, a tradingprocess, for trading a security in an electronic market, includes anorder entering process to enter an order at a client station forexecuting against any market participant that can at least in partsatisfy the order, a threshold process to determine a threshold forexecuting the entered order based on an inside price of the security inthe electronic market, a matching process to match a portion of theentered order at a server system against interest in the market thatdoes not exceed the determined threshold, and a returning process toreturn any unmatched portion of the entered order that can not bematched by the interest in the market without exceeding the determinedthreshold.

One or more of the following features may also be included.

The threshold may be determined based on an inside bid of the securityif the entered order is a sell order. The threshold may be the insidebid minus a percentage of the inside bid and minus a constant. Thepercentage may be ten percent and the constant may be $0.01. Thepercentage of the inside bid may be adjustable in increments of tenpercent. The threshold may be determined based on an inside offer of thesecurity if the entered order is a buy order. The threshold may be theinside offer plus a percentage of the inside offer and plus a constant.The percentage may be ten percent and the constant may be $0.01. Thepercentage of the inside offer may be adjustable in increments of tenpercent.

One or more advantages can be provided from the above. The inventiondecreases the probability that a large market order, or a marketablelimit order with a price that largely differs from the inside market,will execute through several price levels and produce a new inside priceunrelated to the previous quotes/orders in the system. By determining athreshold based on the current inside market, portions of entered ordersthat exceed the threshold are not executed and are returned to themarket participant that entered the orders. By returning these largeorders, which are often entered unintentionally due to typing errors,unnecessary volatility in the market is reduced.

DESCRIPTION OF DRAWINGS

FIG. 1 is a block diagram of a market system.

FIG. 1A is a diagram showing a format for quotes.

FIG. 1B, a diagram depicting an entry screen for non-directed orders orpreferenced orders.

FIG. 2A is a block diagram showing arrangement of a quote/ordercollector facility.

FIG. 2B is a logic view of functions in the quote/order collectorfacility.

FIG. 3A is a flow chart showing a quote/order manager.

FIG. 3B is a flow chart showing a montage manager.

FIG. 4 is a flow chart of an execution/routing manager.

FIG. 4A is a flow chart for calculating and applying an inside pricethreshold.

FIG. 5 depicts the arrangement of FIGS. 5A-5D.

FIGS. 5A-5D are flow charts depicting details of the execution/routingprocess.

FIGS. 6A-6B are flow charts depicting processing for Directed Orders.

FIGS. 7A-7B are flow charts depicting processing for Preferenced Orders.

FIG. 8 is a flow chart of a quote montage update manager.

FIG. 9 is a diagram depicting a montage and order entry for directedorders.

DETAILED DESCRIPTION

Referring to FIG. 1, an electronic market 10 is shown. The electronicmarket 10 includes client systems 12 that access a central quote/ordercollector system 20. The client systems 12 can be broker/dealer systems12 a, electronic communication networks (ECN's) 12 b, market-markersystems 12 c, and other exchanges 12 d. The connections can use existingNASDAQ protocols such as SelectNet®, Small Order Execution System^(SM)(SOES^(SM)), and so forth. The client systems 12 include a processor,memory and a storage device, e.g., a client workstation or personalcomputer (all not shown) that can include a client process to enterquotes/orders into the electronic market system 10. The quote/ordercollector system 20 causes the order execution or order delivery systems(e.g., SOES^(SM) and SelectNet®) to deliver executions or orders to amarket that is coupled to a clearing system 16 and a reporting system18. It also causes delivery of executions or routing of orders to theECN's 12 b, depending on the status of the ECN, and routing of orders toother markets and exchanges 12 d. The quote/order collector system 20 iscomprised of one or preferably a plurality of server computers generallydenoted as 22 including a processor 22 a, main memory 22 b and storage22 c. The storage system 22 c includes quote/order collector process 25that is executed in memory 22 b. In general, server 22 is a complexcomputer server, the details of which are not important to anunderstanding of the present invention.

The quote/order collector process 25 collects pre-trade information inthe form of quotes or orders. The distinction between a quote and anorder depends on several factors. For example, each market maker cansend a proprietary quote, i.e., a quote that represents its own tradinginterest, or an agency quote that represents trading interest of asponsored entity. If one proprietary quote is sent it could beconsidered one order. If one agency quote is sent it also could beconsidered one order. If an agency quote reflects an aggregation of morethan one agency order, however, the aggregate agency order could beconsidered a quote. Entering quotes are limited to registered marketmakers 12 c and ECNs 12 b and possible UTP Exchanges 12 d. For any givenstock, a registered market maker or ECN may directly enter anon-marketable order, i.e., quote into the system 20 on behalf of itscustomer account, or it may sponsor the direct entry of an order by itscustomer. All sponsored, quotes are sent to the quote/order collectorsystem 20 under the name of the sponsoring market maker or ECN. Everyregistered market maker or ECN can submit an unlimited number ofnon-marketable quotes to the system 20.

As shown in FIG. 1A, each quote 19 submitted to the electronic marketsystem 10 can include a displayed quote size 19 a, a reserve size 19 band an indication 19 c (ATTR) of whether the quote size is attributableor non-attributable. Quote size 19 a, when attributable based onindicator 19 c, is directly attributable to the market maker or ECN andis displayed in a “current quote” montage on an order display window 250to be discussed below in FIG. 9. Quote size 19 a when non-attributableis the size that the market maker or ECN wishes to display to themarketplace through an aggregate montage of the order display window 250discussed below in FIG. 9. This quote size 19 a is not attributable tothe market maker or ECN until it is executed. Reserve size 19 b is thesize that is not displayed to the marketplace but that is immediatelyaccessible through the quote/order collector system 20. In order to usereserve size 19 b, a market maker can be required to have a minimumamount displayed in the aggregate quote size 19 a without attributableindicator 19 c.

The current quote montage 257 of the window 250 without agency quotes issimilar to the long existing Nasdaq® display montage, whereas thecurrent quote montage 257 with the agency quotes as depicted in FIG. 9is similar to that shown in U.S. patent application Ser. No. 09/208,942,filed on Dec. 12, 1998 entitled “DUAL QUOTE MARKET SYSTEM” by Richard G.Ketchum et al. and assigned in part to the assignee of the presentinvention.

A broker/dealer can receive an order from a customer. The broker/dealercan send that order to the order collector system 20 to be executed withquotes that are posted by electronic communication networks, marketmakers or other markets. In this arrangement, orders of broker/dealersare not posted as quotes.

Referring to FIG. 1B, an entry screen 17 for non-directed order entry isshown. The screen 17 allows a participant to enter non-directed ordersand would generally include fields 17 a-17 e for entering informationincluding price, amount, and also three type fields. The type fields 17c-17 e determine how the order interacts in the execution/routingmanager 26 d (shown in FIG. 2B) against Quoting Market Participant'scontra-side quotes/orders. The type fields choose a priority, e.g.,price/time box 17 c; or price/size/time box 17 d; or price/time thataccounts for ECN access fees box 17 e.

The screen 17 can also have a field 17 f to enter a quoting marketparticipant's symbol for the purpose of entering preferenced orders.Optionally, the screen 17 can have fields 17 g, 17 h to indicate apreference order type, e.g., a preferenced order that has pricerestrictions box 17 g or a preferenced order that does not have pricerestrictions box 17 h. Alternatively, the electronic market system 10can be configured to accept only one type of preferenced order and notthe other.

Order Collector Facility

Referring to FIG. 2A, the quote/order collector system 20 receivesquotes, liability orders, (non-liability orders) and directed ordersfrom market participants. The quote/order collector system 20 allows aquote/order to be displayed in the market, and also allows formarketable orders to be executed or routed to market participants.

The order quote collector system 20 also includes an interface 21 thatcouples the order collector system 20 to a plurality of order deliverysystems. For example, the interface 21 can couple the order quotecollector system 20 to an order execution system, e.g., the Small OrderExecution System® (SOES^(SM)) and to an order delivery and negotiationsystem, e.g., SelectNet®. The interface 21 would provide access toinformation contained in order flow delivered via the delivery systemsto a quote/order collection process 25 described in conjunction withFIG. 2B. In general, the electrical and logical functions which comprisethe interface 21 can be similar to the ones currently existing in theSOES^(SM)/SelectNet® systems. The interface 21 or the process 25 wouldextract information from the quotes and make that information availableto the quote order collector process 25. The quote/order collectorprocess 25 extracts information and processes orders in a unified mannerto allow the order/quote collector system 20 to be a unifying point ofcollection of all orders that are sent to the market 10.

The interface 21 can also be used to route executions of liabilityorders back to market participants whose quotes/orders were executedagainst and can deliver orders, both liability orders for execution ornon-liability orders for negotiation against market participants whosequotes are selected for further negotiation via the SelectNet® systems.

Referring to FIG. 2B, the quote/order collector process 25 is shown. Thequote/order collector process 25 provides transmission of multipleorders or quotes at multiple price levels by Quoting Market Participantsto a quote/order manager 26 a. The quote/order manager 26 a provides aunified point of entry of quotes and orders from disparate deliverysystems into the quote/order collector system 20 to access quotes/ordersdisplayed (as either attributable or non-attributable) in both theaggregate montage and current quote montage. The quote/order manager 26a manages multiple quotes/orders and quotes/orders at multiple pricelevels and uses a montage manager 26 b to display (either in theAggregate montage or in the current quote montage) the orders/quotesconsistent with an order's/quote's parameters. The order collectorprocess 25 also includes an internal execution process manager 26 c tomatch off executions for quoting market participants at the bestbid/offer. The order collector system 20 also includes an orderexecution/routing manager 26 d providing a single point delivery ofexecutions or routing of orders, which substantially eliminatespotential for dual liability. That is, order collector process 25 willmaintain the order routing and executions functionality available in theSOES^(SM) and SelectNet® systems. The order collector process 25 alsoincludes a lock/cross quote manager 26 e, and an odd lot executionmanager 26 f.

Referring to FIG. 3A, the order collector process 25 receivesorders/quotes and time stamps 42 each order/quote upon receipt. Thistime stamp determines the order's/quote's ranking for automatedexecution. Quotes/orders are designated as either attributable ornon-attributable, and could also have a reserve size discussed above.The order collector process 25 aggregates all of a Quoting MarketParticipant's attributable and non-attributable orders at a particularprice level, and disseminates order/quotation information into theaggregate montage and/or the current quote montage, as will be discussedbelow.

The order entry process 25 determines 43 whether the receivedquote/order corresponds to a reserve quote. If the quote does notcorrespond to a reserve quote then the quote is a displayable quote thatis attributable or non-attributable. The order entry process 25 compares44 the received quotes/orders to existing quotes/orders to determine 46whether the price of quotes/orders fall in existing quote/order pricelevels. Any number of quote/order price levels can be accommodatedalthough in this example, only three price levels will be displayable inthe non-attributable i.e., aggregate montage. If the quote price is in adisplayable price level it is a displayable quote eligible for automatedexecution. The order collector system 20 can be provided with more pricelevel depth than the three levels, e.g., a depth of 20-25 levelsalthough only a limited number, e.g., three would be displayed at anyone time.

If the quote is within one of the pre-defined quote levels, the process25 determines 48 new non-marketable quote/orders sizes by adding thequote/order size corresponding to the received quote/order to quotesizes at that price level already in the system 20. The process 25 willcause the new non-marketable quote sizes to be displayed 50. If thequote is not within one of the pre-defined quote levels, the process 25stores 52 the quote at a new price level and determines 54 if it is at abetter price. If the quote is at a better price, the process 25 changes56 current levels to cause a new price level for non-marketable quotesizes to be displayed 50.

Referring to FIG. 3B, the montage manager 26 b of the quote/ordercollector process 25 determines 60 which price levels to display anddetermines 61 if an order is a non-attributable order. If the order isnon-attributable, the quote/order collector process 25 will store andsum 66 the quote with like quotes to produce an aggregated quote anddisplay 68 the aggregate size of such orders in the aggregate montagewhen the orders fall within one of the three top price levels. Forattributable orders, the aggregate size of such orders is displayed inthe current quote montage once the order(s) at a particular price levelbecomes the particular quoting market participant's best attributablebid or offer in the current quote montage. This interest will also beaggregated and included in the aggregate montage if it is within thedisplayed price levels. Market makers and ECNs can have one MMID andpossibly an agency MMID against which they can display attributablequotes. If a market maker has an agency quote, attributable orders willbe displayed once the order or orders at a particular price level becomethe market participant's best agency quote.

Quote/order collector facility 20 (shown in FIG. 1) provides severaladvantages to the market. One advantage is that it ensures compliancewith the regulatory rules such as the SEC Order Handling Rules, and inparticular the Limit Order Display Rule and SEC Firm Quote Rule. WithQuote/order collector system 20 it is less likely that a Quoting MarketParticipant, because of system delays and or/fast moving markets, willmiss a market because the Quoting Market Participant is unable toquickly transmit to the system 20 a revised quote (which may represent alimit order).

Nondirected Orders

Referring to FIG. 4, a flow chart for an execution/routing process 70that is associated with the order execution/routing manager 26 d (shownin FIG. 2B) is shown such that the market 10 allows market participantsthat enter Non-Directed Orders three options as to how the orderinteracts with the quotes/orders in the system 20. An exemplary formatwas described above in FIG. 1B. These choices are that the orders canexecute against displayed contra side interest in strict price/time; orprice/size/time; or price/time that accounts for ECN access fees. Thiscan be set by selecting one of the options on the order entry screen(FIG. 1B). As a default, the system 20 can execute Non-Directed Ordersin general price/time priority. A non-directed order is an order that isnot executed or routed for response to a particular Quoting MarketParticipant, e.g., a particular market maker or ECN.

A market participant can immediately access the best prices in system20, as displayed in the aggregate montage, by entering 72 a non-directedorder into the collector process 25 (shown in FIG. 1). A non-directedorder is designated as a market order or a marketable limit order and isconsidered a “Liability Order” and is treated as such by the receivingmarket participant. Once the order has been entered 72 into thecollector process, the execution/routing process 70 determines 76 if theorder is marketable. Under the current system 20 design, marketparticipants may enter an order up to a size of 999,999 shares into thesystem for execution. A large market order, or a marketable limit orderwith a price exceptionally different from the inside price, can executethrough several price levels and produce a new inside price unrelated tothe previous quotes/orders in the system. Often these large orders areentered unintentionally by market participants who are attempting toenter smaller size orders and erroneously enter the wrong price fortheir orders. To detect these errors and other similar problems,thresholds are calculated so that such erroneous orders are returned tothe entering firm after executing as much of the order as possible up toand including the threshold price.

By calculating a price threshold based on the inside (bid or offer)price, the portion of an entered order that would move the inside priceby a certain percentage can be returned to the market participant whilethe portion of the entered order that would not move the inside pricebeyond the percentage is executed. After the portion that exceeds pricethreshold is returned, the market participant has the option to re-enterany of the un-executed portion for later execution. Also, in calculatingthe price threshold, the percentage of the inside price, used tocalculate the price threshold, is adjusted as necessary to protectmarket participant or as dictated by market conditions in order toprevent unnecessary volatility in the market.

Referring to FIG. 4A an inside price threshold process 300 is shown forcalculating and applying an inside price threshold to an entered order.The inside threshold process 300 starts 302 when a non-directed order isreceived by the collector process 25 (shown in FIG. 1) for determiningif the order is marketable 76 (shown in FIG. 4). Once the order isentered 304, the process 300 calculates 306 the inside price threshold.For an entered order that is a sell order the inside price threshold(IPT) is the current inside bid less the product of the inside bid andthe threshold percentage (chosen here to be 10% although otherpercentages can be used) and minus a constant (chosen here to be $0.01although other constant values can be use) as shown in the followingequation:IPT (for sell order)=Inside Bid−(Inside Bid*10%)−$0.01.

For an entered order that is a buy order, for a particular security, theinside price threshold is the current inside offer of the security plusthe product of the inside offer and the threshold percent and plus aconstant. Similar to calculating the inside price threshold for a sellorder, a threshold percentage of 10% (although other percentages can beused) and an constant of $0.01 (although other values can be used) areused in the following equation:IPT (for buy order)=Inside Offer+(Inside Offer*10%)+$0.01.

However, as mentioned the threshold percentage can be adjusted up ordown, for example in increments of 10%, as market conditions dictate.After the process 300 has calculated 306 the inside price threshold, theprocess applies the threshold to the entered order by determining 308 ifa portion of the order exceeds the threshold. If no portion of the orderexceeds the threshold, the process 300 passes 310 the order forexecution and exits 314. If the process 300 determines that a portion ofthe order exceeds the inside price threshold, the order portion thatdoes not exceed the inside price threshold is passed 312 for executionand the order portion that does exceed the inside price threshold isreturned to the market participant that entered the order, and then theprocess 300 stops 314.

To demonstrate an example of the process 300 in operation, a stock Q hasa current inside bid price of $10.00. Market participant A enters amarket (i.e., unpriced) sell order for 10,000 shares. There arecurrently bids available to buy 4,000 shares between $8.99 and $10.00,and bids available to buy another 100 shares at $8.98. Using the formulaabove to calculating inside price threshold (IPT) for a sell order, theIPT is:IPT (for sell order)=$10.00−($10.00*10%)−$0.01=$8.99.

By applying this threshold of $8.99, 4,000 shares of the market sellorder will be executed at the prices of $8.99 to $10.00 since none ofthe prices are below the sell order threshold of $8.99. However, theremaining 6,000 shares are returned to market participant A since thebids for 100 shares at $8.98 are below the threshold price and there isno additional liquidity at or above this inside price threshold.

As discussed above, an inside price threshold can be calculated andapplied to non-directed buy and sell orders. However, in somearrangements an inside price threshold may also be calculated andapplied to directed orders (discussed below), preferenced orders (alsodiscussed below), or other similar orders.

Returning to FIG. 4, in some arrangements, if a non-directed limit orderis marketable when entered into the system 20, for example by notexceeding the inside price threshold, but subsequently becomesnon-marketable because of a change in the inside market, the system 20may hold 74 the order for e.g., 90 seconds and not immediately returnthe order to the participant. If within the holding period e.g., 90seconds, the order once again becomes marketable, the system 20 willexecute/send the order to the next Quoting Market Participant in thenon-directed order queue. Additionally, the order entry participant canobtain 78 the status of the order and request a cancel of such order(not shown). In some embodiments, the hold period can be less or can beeliminated and also can be selectively applied to market participantsdepending on how they participate in the market.

Upon entry, the collector process 25 (shown in FIG. 1) will determine 80what market participant is the next Quoting Market Participant in queueto receive an order, based on how the participant desires to have theorder interact in the system 20 (also shown in FIG. 1). Depending on howthat receiving Quoting Market Participant participates in system 20(i.e., automatic execution v. order delivery), the collector process 25will either cause delivery 82 of an execution (via SOES^(SM)) ordelivery of a Liability Order (via SelectNet).

Order Execution Manager

FIGS. 5, 5A-5D, show processing in the order execution/routing manager26 d (shown in FIG. 2B). The order execution/routing manager 26 d willexecute non-directed orders against Quoting Market Participant'squotes/orders based on the chosen priority, e.g., contra side interestin strict price/time; or price/size/time; or price/time that accountsfor ECN access fees priority. As noted above, each quote/order whenentered into the collector process 25 receives a time stamp. The orderexecution/routing manager 26 d will deliver all orders at the bestbid/best offer in chosen priority. The order execution/routing manager26 d can first attempt to provide a match off of orders/quotes enteredby a Quoting Market Participant if the participant is at the bestbid/best offer by calling the internal execution manager 26 c (FIG. 4).Thus, the order execution/routing manager 26 d will call the internalorder execution manager 26 c to try to match off a Quoting MarketParticipant's orders and quotes that are in the system 20 if theparticipant is at the BBO and receives a market or marketable limitorder on the other size of the market.

The system 20 has a default, e.g., a strict price/time priority. If amarket participant does not override the default or selects price/time94, (FIG. 5A) a Non-Directed Order would be executed 96 first againstall displayed quotes/order of market makers, ECNs, and non-attributableagency orders of UTP Exchanges, in time priority between such interest.If the order is not satisfied 98 at that level of priority the orderwill execute 100 against the reserve size of market makers and ECNs intime priority between such interest. If the order still is not satisfied102, (FIG. 5B) the order will execute 104 against principal quotes ofUTP Exchanges, in time priority between such interest.

Alternatively, a market participant can indicate that the orders executeagainst contra side interest on a price/size/time basis. A Non-DirectedOrder would execute 106 (FIG. 5A) against displayed quotes and thenreserve size based on the size of the displayed quote, and then time ifthere is a tie in size. Reserve size is executed against based on thesize of the related displayed quote/order, not the total amount held inreserve. Under this option, orders are processed first against displayedquotes/orders of market makers, ECNs, and agency quotes/orders of UTPExchanges in price/size/time priority between such interest. If theorder is not satisfied 108 (FIG. 5B) at that level of priority the orderwill execute 110 against reserve size of market makers and ECNs, inprice/size/time priority of such interest, with size priority based onthe size of the related displayed quote/order. If the order is still notsatisfied 112 (FIG. 5C) at that level of priority the order will execute114 against principal quotes of UTP Exchanges, in price/size/timepriority between such interest.

A third choice enables a market participant to indicate that their ordershould be executed in a manner that accounts for ECNs quote-access fees.If a market participant selects this option 116, (FIG. 5A) Non-DirectedOrders execute 118 (FIG. 5A) first against displayed quotes/orders ofmarket makers, ECNs that do not charge a separate quote-access fee, andnon-attributable agency orders of UTP Exchanges. The order can alsoexecute against the quotes/orders of ECNs that charge a separatequote-access fee where the ECN indicates that price improvement offeredby the quote/order is equal to or exceeds the quote-access fee. Theexecution is in time priority between such interest.

If the order is not satisfied 120 (FIG. 5B) at that level of prioritythe order will execute 122 against displayed quotes/orders of ECNs thatcharge a separate quote-access fee to non-subscribers. If the order isnot satisfied 124 at that level of priority the order will execute 126against reserve size of market makers and ECNs that do not charge aseparate quote-access fee to non-subscribers, as well as reserve size ofquotes/orders from ECNs that charge a separate quote-access fee tonon-subscribers where the ECN entering such quote/order has indicatedthat the price improvement offered is equal to or exceeds thequote-access fee. Execution is in time priority between such interest.If the order is not satisfied 128 at that level of priority the orderwill execute 130 against principal interest of UTP Exchanges, in timepriority between such interest.

With all three approaches, the market 10 would make an exception forNon-Directed Orders entered by a market participant when that marketparticipant is also at the inside market. In that case, the system 20will match off the Non-Directed Order to buy/sell against that marketparticipant's inside quote/order to sell/buy, in lieu of sending it tothe participant next in the queue. Additionally, there would be anexception for “Preferenced Orders” described below.

The Non-Directed Order Processing takes into consideration that factorsother than cost or access fees may be important to market participantsin making investment decisions. The system 20 (shown in FIG. 1) givesmarket participants the choice to determine how best to execute theircustomer or proprietary orders. The execution algorithm/logic forNon-Directed Orders provides a flexible approach allowing marketparticipants choices of how best to interact with the market. Thisprocessing is an attempt to address best execution concerns while beingflexible to meet participant's needs without imposing a needlessly rigidstructure similar to a central limit order book (“CLOB”). Additionally,a strict price/time priority (without choice) would force the publicinvestor to pay ECN quote access fees, thus squashing competition.

Referring to FIG. 5D, if the order is not filled 136, the orderexecution/routing manager 26 d will move 134 to the next price level,after a predefined delay, e.g., a 5 second interval delay 132 beforeattempting to execute an order at the new price level. The price-levelinterval delay will give market participants time to adjust their quotesand trading interests before the market moves precipitously throughmultiple price levels, which may occur when there is news, rumors, orsignificant market events. Thus, the price-level interval delay is amodest and reasonable attempt to limit volatility. In some embodimentsthis delay can be eliminated.

Directed Orders

Referring to FIG. 6A, directed order processing 150 is shown. Thecurrent quote montage allows Quoting Market Participants to advertisetheir buying or selling interest. Directed Order processing rules insystem 20 (shown in FIG. 1) allow ECNs and market makers to elect toreceive liability orders against their quote. A market maker or ECNcould choose to receive a Directed Order that is also a liability order,or could also choose to accept only non-liability Directed Orders. Themarket maker or ECN designates that it desires to receive directed orderas liability or non-liability, i.e., negotiation orders. Each marketparticipant can inform the market on how it desires to receive directedorders. In some embodiments this can be across all stocks traded by themarket participant whereas in other embodiments it could be on a stockby stock basis.

The system 20 fetches information from a profile set up for the marketparticipant to determine 152 the type of directed order the quotingmarket participant accepts. The process 150 determines 154 if thequoting market participant chooses to accept directed liability orders.If the quoting market participant chooses to accept directed liabilityorders the system 20 appends 156 an indicator to the quoting marketparticipant's MMID, showing that the market participant is available toreceive directed liability orders.

Referring to FIG. 6B, for a process 160 to access a specific quote inthe current quote montage, the system 20 receives 162 a “directed order”entered by a market participant into the system 20 to begin thenegotiation process with a particular Quoting Market Participant. Theparticipant enters a Directed Order into the system 20 via an interfaceat a client system. This is accomplished by using a mouse or otherdevice to access a specific Attributable Quote/Order displayed in theQuotation Montage, discussed below. An example of directed order entryis shown in FIG. 9.

The process 160 determines 164 if the Quoting Market Participant towhich a Directed Order is being sent has indicated that it wishes toreceive Directed Orders that are Liability Orders. Such liabilitydirected orders must be designated at the time of entry as an“All-or-None” order (“AON”) or a “Minimum Acceptable Quantity” (MAC)order. The system 20 will check 166 to make sure that these conditionsare satisfied. An AON order is an order that is at least one normal unitof trading (e.g. 100 shares) in excess of the Attributable Quote/Orderof the Quoting Market Participant to which the order is directed. A“Minimum Acceptable Quantity” order (“MAQ”) has a size value of at leastone normal unit of trading in excess of Attributable Quote/Order of theQuoting Market Participant to which the order is directed. The DirectedOrder may have a time in force of e.g., 1 to 99 minutes. In someembodiments, the liability orders can have other characteristics thatwould make it a non-liability orders under regulatory or market rules.

If the order is a valid liability order or a nonliability order, theorder is routed 168 by the system 20 to a specific MMID designated bythe market participant. Directed Orders are always delivered forresponse (accept or decline), as opposed to an automatic execution viathe system 20 against the receiving market participant's quote. DirectedOrders can access liquidity held by a specific market maker or ECN.Directed Orders are processed independent of the Non-Directed Orderqueue.

In prior systems, the purpose of a non-liability designation was tolimit the potential for dual liability that results from having two(non-linked) points for delivering liability orders against the samemarket maker quote. With this approach the directed order options allowa market participant to set-up order routing arrangements that areoutside of the directed order process and provide executions to incomingorders in amounts that are in excess of displayed quotes. This would beof special interest to institutional market makers and ECN's.

Preferenced Orders

Referring to FIG. 7A, processing 180 for a class of orders referred toas “Preferenced Orders” is shown. A preferenced order is an order thatis preference to a particular quoting market participant e.g., marketmaker or ECN. Preferenced Orders can be of two types. Preferenced Ordersof either type are entered into the system 20 (shown in FIG. 1) throughthe Non-Directed Order Process. The market participant entering thePreferenced Order designates the quoting market participant by itsidentification symbol (“MMID”). Preferenced Orders are processed in thesame “queue” as Non-Directed Orders.

The Preference Order is considered a liability order. As withNon-Directed Orders, a Preferenced Order will be delivered as an orderto a market participant that does not participate in the automaticexecution functionality of the system 20, or will be delivered as anexecution against the preferenced market maker, as well as marketparticipants that choose to accept auto-execution.

The process 180 retrieves 182 preferenced orders from the Non-DirectedOrder queue 183 and determines 184 when a Preferenced Order is next inline to be executed from the Non-Directed Order queue. The process 180will execute 186 against (or will deliver an order in an amount up to orequal to) both the displayed quote/order and reserve size of the quotingmarket participant to which the order is being preferenced (“preferencedquoting market participant”). Any unexecuted portion may be returned 188to the entering market participant.

Referring to FIG. 7B, processing 190 of preferenced orders is shown. Onetype of Preferenced orders is a Preferenced Order with “No PriceRestrictions” and another type is a Preferenced Order with “PriceRestrictions.” In some embodiments the system 20 could include bothtypes while in other embodiments, the system 20 would include one butnot the other type. If the embodiment included only one type then theprocessing described here would be somewhat different. For an embodimenthaving both types, the processing 190 determines 192 if there are pricerestrictions.

For Preferenced Orders with No Price Restrictions 194 the next in-linePreferenced Order will be executed (or delivered for execution) at thepreferenced quoting market participant's price, regardless of whetherthe quoting market participant is at the best bid/best offer (“BBO”).The execution will occur at the preferenced quoting market participant'squoted price. Thus, under this approach, Preferenced Orders may beexecuted at the BBO or outside the BBO.

The purpose of this type of Preferenced Order is to maintainfunctionality similar to that which currently exists in Nasdaq. That is,today market participants often use the SelectNet service to send ordersto market makers or ECNs who are quoting at the BBO or away from theBBO. Market participants sometimes attempt to “sweep the street” oraccess liquidity at or near the inside market. A market maker that is“working” an institutional order may also send a SelectNet message to amarket maker or ECNs who is quoting away from the inside. This may occurif the market maker believes the market participant has greater size tooffer, and thus will result in a more efficient execution for theinstitutional customer. This functionality does not obviate bestexecution obligations.

With Preferenced Orders with Price Restrictions 196 there will be pricerestrictions that accompany the Preferenced Orders. That is, when aPreferenced Order is next in line to be executed from the Non-DirectedOrder queue, the Preferenced Order will be executed (or delivered forexecution) against the preferenced quoting market participant to whichthe order is being directed only if the quoting market participant is atthe BBO (up to the displayed and reserve size). If the quoting marketparticipant to which the order is being directed is not at the BBO whenthe Preferenced Order is next in line to be delivered or executed, thePreferenced Order will be returned to the entering participant. Thus,under this approach, Preferenced Orders only will be executed at theBBO, and only if the preferenced quoting market participant is quotingat the BBO at the time of order delivery (or execution).

Comparison of Directed Orders and Preferenced Orders.

The Directed Order and Preferenced Order features provide differentoptions for order processing. The Directed Order Process operates muchlike SelectNet operates in the current environment except that thecurrent system 20 (shown in FIG. 1) offers a choice of how the directedorders are treated by the quoting market participants. Directed Orderswill be delivered to a single market participant that is designated byMMID by the sender of the order. Directed Orders are always deliveredfor response (e.g., accept or decline), as opposed to an automaticexecution against the receiving market participant's quote. DirectedOrders will not decrement a quote.

Preferenced Orders on the other hand share some functionality withNon-Directed Orders, in that they are processed in time sequence, willbe delivered to a quote/order or will automatically execute against aquote/order of a market participant, and will decrement the size of aquote/order. Unlike Non-Directed Orders, however, Preferenced Orders arenot processed pursuant to one of the three order execution algorithmsdescribed above.

Referring to FIG. 8, a quote update process in the quote size manager 26e is shown. The process determines 202 participant type. If an executionis delivered to a Quoting Market Participant if that participant acceptsautomatic executions (i.e., market makers or ECNs that choose to acceptautomatic executions via the SOES^(SM)), quote size manager 26 e willautomatically decrement 204 the aggregate quote in the aggregate montageby the size of the incoming order, and the Quoting Market Participant'squote in the current quote montage if the quote/order is attributable.For Quoting Market Participants who accept automatic execution, if theparticipant's displayed size is decremented to zero 206, the QuotingMarket Participant's displayed (attributable or non-attributable) sizewill be replenished from reserve if the market participant has reservesize by calling 208 an auto quote refresh.

If an ECN accepts automatic execution via SOES^(SM) its display sizewill be decremented 220, and if its quote is exhausted to zero 222without update or without transmission of another attributablequote/order, quote size manager 26 e will zero out 224 the one side ofthe quote that is exhausted. If both the bid and offer size of the ECNsmarket is reduced to zero 226 without update or transmission of anotherattributable quote/order, the ECN will be placed into an excusedwithdrawal 228 and restored once the ECN transmits revised quotes.

For Quoting Market Participants that do not participate in automatedexecution, e.g., ECNs that opt out of automatic execution and UTPExchanges that only participate in order delivery, the execution manager26 d will deliver a Liability Order of a size that is equal to or lessthan the participant's quoted size. System 20 will automaticallydecrement 230 the participant's 222 quote by the size of the orderdelivered, but quote size manager 26 e will move 232 the participant tothe bottom of the queue and not deliver another order to such QuotingMarket Participant until the Quoting Market Participant has processedthe order by providing a complete or partial fill of the order. If suchQuoting Market Participant declines or partially fills the order, System20 will send the order (or remaining portion thereof) back into thequeue for delivery to the next available Quoting Market Participant. Inaddition, if the Quoting Market Participant declines or partially fillsthe order, or if the participant fails to respond in any manner within anumber of seconds of order delivery (e.g., 30 seconds), System 20 willpresume equipment failure and will take corrective action.

For ECN's, quote size manager 26 e will zero out that side of the ECN'smarket, and for UTP Exchanges quote size manager 26 e will place theparticipant at the lowest bid and highest offer price for a trading unite.g., 100 shares until updated. This is necessary to ensure that QuotingMarket Participants that do not provide timely executions due toequipment or other failures do not hold up the market and cause queuingof orders within the system 20. As noted previously, market makers willbe required to maintain a two-sided, attributable proprietary quote(other than its Agency Quote) in system 20 at all time. To assist withthis requirement, market makers can use an AutoQuote Refresh (“AQR”)process e.g., that available in the SOES^(SM).

When a market maker's proprietary quote (both displayed and reserve) isexhausted to zero, the system will refresh the market maker's price onthe bid or offer side of the market, whichever is decremented to zero,by an interval designated by the market maker and the market makers sizeto a level designated by the market maker. When the market maker's quoteis refreshed, however, the AQR will refresh the market maker'sattributable quote/order (not the non-attributable quote). AQR will notbe available for Agency Quotes. Additionally, if a market maker does notuse AQR but otherwise has another attributable proprietary quote inSystem 20, System 20 will automatically display the market maker's nextbest attributable proprietary quote when its current attributable quoteis exhausted.

If a market maker's quote is decremented to zero and does not update itsnon-agency quote via AQR, transmit a revised attributable quote toSystem 20, or have another proprietary attributable quote/order insystem 20, system 20 will place the market maker's quote (both sides) ina closed state for a short period of time, e.g., three minutes. At theend of that time period, if the market maker has not on its own updatedits quote or voluntarily withdrawn its quote from the market, System 20will refresh the market maker's quotation to 100 shares at the lowestmarket maker bid and highest market maker offer currently beingdisplayed in that security and reopen the market maker's quotation.

Montage

Referring to FIG. 9, the system 20 (shown in FIG. 1) uses a compositemontage 250. One component of the composite montage 250 is the currentmontage 254 that exists in the current Nasdaq Workstation II, (NWII)presentation. The current montage 254 has two primary displaycomponents. One component 255 is the Market Minder Window, which allowsmarket participants to monitor price activity (inside bid/offer and lastsale) of selected stocks, and the Dynamic Quote window, which shows fora particular stock the inside bid and offer, the last sale, change inprice from previous close, daily high and low, volume, and the shortsale arrow indicator. The other component is current quote montage 257.The current quote montage 257 shows for a particular stock two columns(one for bid, one for ask), under which is listed the MMIDs for eachregistered market maker, ECN, and UTP Exchange in the particular stockand the corresponding quote (price and size) next to the MMID. System 20ranks the bids and offers along with the corresponding MMID inprice/time priority. Accordingly, the market participant at the best bidwho is first in time appears first in the montage, the marketparticipant at the best bid (or the next best bid) who is next in timeis ranked second, and so forth.

Market makers are required to submit a two sided proprietary quote, andECNs that participate in System 20 may submit a one or two sided quote.UTP Exchanges generally submit two sided quotes, which represent theexchange specialist's best quote in the stock at issue. While a marketmaker's quoted price and size is attributed to the market maker by thecorresponding MMID, this may not represent the market maker's best priceif the market maker has placed a better priced order into an ECN thatcomplies with the Display Alternative Rule or designate its betterpriced quote as non-attributable.

Accordingly, a market maker may be displaying in the current quotemontage a proprietary bid of $20 when the market is $20 ⅛ to 20 ¼, butthe market maker may be displaying in a qualifying ECN a bid of $201/16. The $20 1/16 quote may only be seen by subscribers of the ECN inwhich the market maker has placed the order and is not visible to thesystem 20 or market participants unless and until $20 1/16 becomes thebest bid in the ECN.

A Quoting Market Participant may indicate that a quote/order has reservesize. Reserve size will apply to a market maker's proprietary as well asAgency Quote, and the market maker may be required to display a minimumnumber of shares, e.g., 1,000 shares. Reserve size will replenishdisplayed size (attributable only or non-attributable) by at least 1,000shares (or a default amount) once displayed size is decremented to zero.Reserve size along with displayed (both attributable andnon-attributable) size, will be accessible through system 20. Reservesize, however, will not be displayed in either the aggregate montage orthe current quote montage. As described above, system 20 will accessreserve size after all displayed size is exhausted.

The current quote montage 254 also includes a special MMID (herereferred to as “SIZE”) that represents the aggregate size of allnon-attributable quotes/orders at the best bid/best offer displayed inthe current quote montage 254 along with the other MMIDs for the QuotingMarket Participants displaying attributable size at the inside. There isone “SIZE” MMID for the bid and offer side of the market. The aggregatesize of the best bid/best offer displayed in the aggregate montage willequal the sum of the SIZE MMID displayed and the individual sizes of theMMIDs at the best bid/best offer displayed in the current quote montage.The “SIZE” MMID is provided to properly calculate and disseminate thesystem 20 best bid and best offer (“BBO”) along with the accompanyingmarket center, e.g., for a national quotation service.

System 20 provides a “Summary Scan” function as part of the aggregatemontage. The Summary Scan function is a query function that can provideinformation at the total displayable size (attributable andnon-attributable) for all levels. The Summary Scan anonymously displaysinterest (attributable and non-attributable) at each price level on bothsides of the market, but is not dynamically updated.

The system 20 can use “point-and-click” window-type technology so thatmarket participants can enter non-directed or preferenced marketableorders by simply clicking on controls in aggregate quote montage 254 inthe window 250. For example, each of the entries in the aggregate quotemontage 254 can be a control button so that a simple click on thecontrol, e.g., the total shares displayed 255 a (FIG. 4) can activate anexecution. The click with a mouse or the like at the inside bid in thetop-half of the window 250 could enter a “default” order priced at thedisplayed price for the displayed shares. The system 20 would allow atrader to set a “default” number of shares, e.g., 1000 shares. Forexample, whenever a trader clicked on the aggregate shares displayed atthe inside bid the trader's system 12 would generate an order for 1,000shares at the inside price. In addition, a “right-click” on theaggregate display would permit a trader to customize the order at thepoint of entry. A window can pop up allowing the market participant toenter the information as described in FIG. 1B. Of course some of thisinformation may be automatically entered by the system.

The system can also allow a market participant to enter directed ordersin much the same manner by clicking on a quote in the current quotemontage. The system will produce a window 260 that allows a participantto enter a size and select if the directed order is “AON” or “MAQ” type.

The inside price threshold process 300 (shown in FIG. 4A) describedherein is not limited to the software embodiment described above; it mayfind applicability in any computing or processing environment. Theinside price threshold process may be implemented in hardware, software,or a combination of the two. For example, the inside price thresholdprocess may be implemented using circuitry, such as one or more ofprogrammable logic (e.g., an ASIC), logic gates, a processor, and amemory.

The inside price threshold process may be implemented in computerprograms executing on programmable computers that each includes aprocessor and a storage medium readable by the processor (includingvolatile and non-volatile memory and/or storage elements). Each suchprogram may be implemented in a high-level procedural or object-orientedprogramming language to communicate with a computer system. However, theprograms can be implemented in assembly or machine language. Thelanguage may be a compiled or an interpreted language.

Each computer program may be stored on an article of manufacture, suchas a storage medium (e.g., CD-ROM, hard disk, or magnetic diskette) ordevice (e.g., computer peripheral), that is readable by a general orspecial purpose programmable computer for configuring and operating thecomputer when the storage medium or device is read by the computer toperform the functions of the inside price threshold process. The insideprice threshold process may also be implemented as a machine-readablestorage medium, configured with a computer program, where, uponexecution, instructions in the computer program cause a machine tooperate to perform the functions of the inside price threshold processdescribed above.

Embodiments of the inside price threshold process may be used in avariety of applications. Although the inside price threshold process isnot limited in this respect, the distribution process may be implementedwith memory devices in microcontrollers, general purposemicroprocessors, digital signal processors (DSPs), reducedinstruction-set computing (RISC), and complex instruction-set computing(CISC), among other electronic components.

Embodiments of the inside price threshold process may also beimplemented using integrated circuit blocks referred to as core memory,cache memory, or other types of memory that store electronicinstructions to be executed by a microprocessor or store data that maybe used in arithmetic operations.

A number of embodiments of the invention have been described.Nevertheless, it will be understood that various modifications may bemade without departing from the spirit and scope of the invention.

1. A method for trading a security in an electronic market, the methodcomprises: entering an order at a client station for executing againstany market participant that can at least in part satisfy the order;determining a threshold for executing the entered order based on aninside price of the security in the electronic market, wherein thethreshold is based on one of an inside bid minus a percentage of theinside bid and an inside offer plus a percentage of the inside offer;matching a portion of the entered order at a server system againstinterest in the market that does not exceed the determined threshold;and returning any unmatched portion of the entered order that can not bematched by the interest in the market without exceeding the determinedthreshold.
 2. The method of claim 1 wherein the determining of thethreshold is based on the inside bid of the security if the enteredorder is a sell order.
 3. The method of claim 2 wherein the threshold isthe inside bid minus the percentage of the inside bid and minus aconstant.
 4. The method of claim 3 wherein the percentage is ten percentand the constant is $0.01.
 5. The method of claim 3 wherein thepercentage of the inside bid is adjustable in increments often percent.6. The method of claim 1 wherein the determining of the threshold isbased on the inside offer of the security if the entered order is a buyorder.
 7. The method of claim 6 wherein the threshold is the insideoffer plus the percentage of the inside offer and plus a constant. 8.The method of claim 7 wherein the percentage is ten percent and theconstant is $0.01.
 9. The method of claim 7 wherein the percentage ofthe inside offer is adjustable in increments often percent.
 10. Acomputer program product residing on a computer readable mediumcomprises instructions, for trading a security in an electronic market,to cause a computer to: enter an order at a client station for executingagainst any market participant that can at least in part satisfy theorder; determine a threshold for executing the entered order based on aninside price of the security in the electronic market, wherein thethreshold is based on one of an inside bid minus a percentage of theinside bid and an inside offer plus a percentage of the inside offer;match a portion of the entered order at a server system against interestin the market that does not exceed the determined threshold; and returnany unmatched portion of the entered order that can not be matched bythe interest in the market without exceeding the determined threshold.11. The computer program product of claim 10 wherein the determinedthreshold is based on the inside bid of the security if the enteredorder is a sell order.
 12. The computer program product of claim 11wherein the threshold is the inside bid minus the percentage of theinside bid and minus a constant.
 13. The computer program product ofclaim 12 wherein the percentage is ten percent and the constant is$0.01.
 14. The computer program product of claim 12 wherein thepercentage of the inside bid is adjustable in increments often percent.15. The computer program product of claim 1 wherein the determinedthreshold is based on the inside offer of the security if the enteredorder is a buy order.
 16. The computer program product of claim 15wherein the threshold is the inside offer plus the percentage of theinside offer and plus a constant.
 17. The computer program product ofclaim 16 wherein the percentage is ten percent and the constant is$0.01.
 18. The computer program product of claim 16 wherein thepercentage of the inside offer is adjustable in increments of tenpercent.
 19. A trading process, for trading a security in an electronicmarket, the trading process comprises: an order entering process toenter an order at a client station for executing against any marketparticipant that can at least in part satisfy the order; a thresholdprocess to determine a threshold for executing the entered order basedon an inside price of the security in the electronic market, wherein thethreshold is based on one of an inside bid minus a percentage of theinside bid and an inside offer plus a percentage of the inside offer; amatching process to match a portion of the entered order at a serversystem against interest in the market that does not exceed thedetermined threshold; and a returning process to return any unmatchedportion of the entered order that can not be matched by the interest inthe market without exceeding the determined threshold.
 20. The tradingprocess of claim 19 wherein the threshold process is based on the insidebid of the security if the entered order is a sell order to determinethe threshold.
 21. The trading process of claim 20 wherein the thresholdis the inside bid minus the percentage of the inside bid and minus aconstant.
 22. The trading process of claim 21 wherein the percentage isten percent and the constant is $0.01.
 23. The trading process of claim21 wherein the percentage of the inside bid is adjustable in incrementsof ten percent.
 24. The trading process of claim 19 wherein thethreshold process is based on the inside offer of the security if theentered order is a buy order to determine the threshold.
 25. The tradingprocess of claim 24 wherein the threshold is the inside offer plus thepercentage of the inside offer and plus a constant.
 26. The tradingprocess of claim 25 wherein the percentage is ten percent and theconstant is $0.01.
 27. The trading process of claim 25 wherein thepercentage of the inside offer is adjustable in increments of tenpercent.